ECS 3702 ASSIGNMENT 3

Content: Question 1 a) Briefly explain why increasing opportunity costs in production arise b) Briefly explain why the production frontiers of different countries have different shapes c) Explain with the aid of a diagram, the gains from trade (exchange and specialization) when increasing costs Question 2 a) Discuss the forms or regional integration. Give an example of each b) Under what conditions will a customs union result in trade creation and higher welfare levels? c) Discuss the dynamic benefits from joining a customs union References: Tenth edition, International economics Trade and Finance. Author Dominick Salvatore International Trade Study guide for ECS302E Notes created by Blair MacCarrie 2010 1 | P a g e This study source was downloaded by from CourseH on :17:11 GMT -05:00 This study resource was shared via CourseH Student no: Assignment 3, semester 1 Unique no: Question 1 a) Explain why increasing opportunity costs in production arise. The law of Increasing opportunity cost is the concept that as you continue to increase production of one product, the opportunity cost of producing the next unit increases. This comes about as you reallocate resources to produce one good that were suited to produce the original product. These increasing costs cause the production frontier to be concave from the origin. An example would be: one nation has land that is flat and good for growing wheat, and some of the land is hilly and good for grazing and milk production. The nation that originally specialized in wheat, now wants to concentrate on producing milk, there will be a small initial opportunity cost because by transferring the nation’s hilly areas from growing wheat to grazing, the nation gives up very little but will get a lot of milk. Now if this transfer process carries on, eventually the flat land that was better suited to wheat growing will now need to be used for grazing. The factors of production are not the same and not used in the same fixed proportions. This will cause the opportunity cost of milk to increase and the production frontier will concave from the origin. b) Explain why the production possibility frontiers of different countries have different shapes. When the PPF is under constant cost and shows the different combinations of two goods that a nation can produce by fully using all its resources with the best technology available. Costs can be constant when factors of production are perfect substitutes and or used in fixed proportion in the production of both products. All the units of the same factor are of exactly the same quality. PPF under constant costs concave and is illustrated on a graph with a straight line, for the two countries. 2 | P a g e This study source was downloaded by from CourseH on :17:11 GMT -05:00 This study resource was shared vi